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ADA Coins in the Voltaire Era

Published 20.5.2024, updated 30.5.2024

With the advent of the Shelley era, ADA holders gained the ability to delegate their coins to a pool of their choice. This put stakers in charge of block production within the Cardano network. If a pool operator fails to meet expectations, stakers have the freedom to delegate to another competing pool at any moment.

This concept of delegation and control extends to on-chain governance with the introduction of the Voltaire era. ADA holders can now delegate their coins to a chosen Delegated Representative (DRep). These DReps act as representatives for ADA holders when voting on governance actions.

Thanks to the implementation of Cardano Improvement Proposal 1694 (CIP-1694), Cardano’s decentralization extends beyond just block production to include governance as well. This means that changes to protocol parameters, withdrawals of ADA from the project treasury, triggering of hard forks, and other governance actions are fully under the control of ADA holders. Cardano is set to be the first project among the top 10 that empowers its community to alter the protocol’s key properties and steer the project’s future course via the treasury.

Governance is a Gray Area

Governance remains a relatively underexplored topic in the realm of blockchain technology, with only a handful of projects choosing to pursue decentralization at the project management level. Despite blockchain technology nearing the end of its second decade, most top-tier projects still have a single dominant client implementation from the original team that launched the blockchain, thereby retaining significant control over protocol changes.

One of the most notable battles over protocol properties occurred between 2015 and 2017 when a segment of the Bitcoin community sought to increase the size of Bitcoin blocks. This led to a division within the community into ‘small blockers’ and ‘big blockers’. The ensuing debates culminated in a protocol fork, resulting in the creation of Bitcoin Cash alongside the original Bitcoin, which retained its original block size. During this period, there was no formal voting mechanism, leading to intense disputes within the community and the Core team.

A blockchain fork, while a solution, is far from ideal as it fragments the community, dilutes the development team, and leads to the creation of new coins. In the context of Smart Contract (SC) applications, a blockchain fork could result in ghost tokens and ghost applications.

This situation raises new questions: Who holds the authority to decide on the project’s key features? Which groups should be responsible for ensuring a fair distribution of power?

Skin In The Game

In an ideal scenario, the decision-making power should lie with those who have the most at stake in selecting the best possible solution. In the context of cryptocurrencies, this group is typically composed of coin holders, such as ADA holders in the case of Cardano. This group represents the largest collection of independent individuals. However, this group may not possess the necessary expertise to make complex decisions, as not every ADA holder is a specialist in IT or economics.

The team that developed the protocol usually has the most knowledge about it. Those who operate the client and produce blocks, such as the Staking Pool Operators (SPOs) in Cardano’s case, also have significant experience. Third-party teams often have a solid understanding of the protocol as well.

These groups may have differing opinions. So, who should have the final say in the event of disputes?

In a decentralized protocol, decision-making cannot be left to individuals or single groups. Decisions must be made through voting. However, voting cannot be confined to just one group, as different groups may have varying preferences and incentives.

Cardano will be governed by three entities: the Constitution Committee, Delegated Representatives (DReps), and Staking Pool Operators (SPOs).

DReps serve as the representatives of ADA holders. Every ADA holder has the option to either register themselves as a DRep or delegate their voting power to a DRep of their choice.

One could argue that Delegated Representatives (DReps) hold the most influential position as they have voting rights on all governance actions. The members of the Constitution Committee can be entirely replaced through a voting process. Only DReps and Staking Pool Operators (SPOs) have the power to vote on the dismissal of the committee and the appointment of its new members.

However, SPOs do not have voting rights on changes to parameters and the withdrawal of ADA from the Treasury. Therefore, it can be concluded that ADA holders, or their representatives (DReps), will wield the most power in Cardano’s governance structure.

It makes sense because they have the most skin in the game. On the other hand, if ADA holders wanted to make a change that would not be in accordance with the Cardano constitution, the constitutional commission can prevent it.

ADA in Governance

The majority of ADA holders are expected to delegate their voting power to a DRep. This is a new form of delegation that is separate from staking pool delegation.

The process of registering DReps and delegating voting power is built on the same mechanisms as those used for registering (and retiring) pools and delegating coins to them. This involves the use of delegation certificates, which are embedded in transactions and thus become a permanent part of the blockchain. As a result, all information is publicly accessible to everyone through the blockchain.

If a Staking Pool Operator (SPO) wishes to become a DRep, they must register. If they want to receive delegations from ADA holders, they must ask them.

Thus, SPOs always vote in the role of SPOs. Their voting power is the stake of the pool, i.e. the pledge and all delegations to the pool. SPOs can also vote separately in the role of DReps. The voting power of SPOs in the role of DReps will be different from their voting power in the role of SPOs because the stake delegated to these two different roles will be different.

ADA holders have 3 options to delegate voting power. They either select one (or more) of the registered DReps or use 1 of the 2 predefined automatic options.

Only registered DReps (real people) decide on governance actions based on their own decisions. They can vote Yes, No, and Abstain.

Voting of automated DReps is predefined.

Delegating to 'Abstain' means that the stake is actively marked as non-participatory in governance. Such a stake will not be included in the Active Voting Stake. However, it will still be registered for the incentives provided to Ada holders who delegate their voting stake.

Delegating to 'No Confidence' implies that the stake is counted as a 'YES' vote for every 'No Confidence' action and a 'NO' vote for all other actions. This delegated stake will be considered a part of the active voting stake.

Some ADA holders will do nothing. This divides the stake into registered (delegated) and unregistered.

An Active Voting Stake refers to the stake that can vote on governance actions. It's the stake that is without ADA coins that have either not been registered for governance or where the holder has explicitly chosen the 'Abstain' option, indicating their decision to never participate in voting.

Active Voting Stake is thus composed only of ADAs delegated to DReps and automated No-Confidence DRep. Other coins are not used in voting.

We can look at Active Voting Stake from the point of view of those who vote or do not vote. As said, only DReps or automated No-Confidence DRep can vote. When counting votes (Lovelaces), stakes that are delegated to automated Abstain DReps, DReps who voted Abstain for a given governance action, and all Inactive DReps are not counted.

If the DRep votes Abstain for a specific governance action, it reduces the Active Voting Stake, i.e. the threshold required for the ratification of the governance action. Thus, DReps do not have to have an opinion on every governance action and can facilitate its ratification by abstaining from voting by explicitly choosing to Abstain.

In the picture, you can see the DRep explicitly voting Abstain. This option reduces the Active Voting Stake.

Note that Inactive DReps do not count towards Active Voting Stake either.

Registered DReps will need to vote regularly to be considered Active.

Specifically, if a DRep does not submit any votes for a particular number of epochs (new parameter drepActivity), the DRep will be considered Inactive.

The reason for marking DReps as inactive is that DReps who stop participating but still have a stake delegated to them do not eventually leave the system in a state where no governance action can pass.

In the picture, you can see the DRep who last voted in Epoch 2. He was still considered an active DRep in Epochs 3, 4, and 5. As of Epoch 7, DRep is considered inactive. DRep decided to vote in Epoch 10, so it immediately became active until at least the end of Epoch 13.

Staking Rewards Only After Choosing DRep

It is desirable that as large a stake as possible be registered for voting. Legitimacy of roster elections with the size of Active Voting Stake.

If ADA holders do not delegate to DRep or automated DReps, they will not be able to withdraw staking rewards.

Staking rewards will continue to be paid to their staking account, so they will not lose their rewards. However, it will be possible to choose the reward only after delegation to the DRep.

As already mentioned, the ADA holder has several options. He can choose a DRep at his best discretion, or register himself as a DRep and delegate his own ADA coins to himself. Alternatively, the ADA holder has two other options: automated DReps Abstain and No-Confidence.

Either of these options will again allow the staker to withdraw staking rewards.

The Constitutional Commission As A Guardian Of Stability And Liveness

What would happen if the DReps ratify an action that could potentially harm Cardano, such as setting the block size to zero?

Rest assured, such a scenario is unlikely to occur. As you already know, DReps are just one of three governance bodies within Cardano. The Constitution Committee is in place to prevent such detrimental actions.

The Constitution Committee is a group of individuals or entities collectively responsible for ensuring adherence to the Cardano Constitution. Members of the commission vote in the style of 1 Person = 1 Vote.

This Constitution is a document that clearly outlines Cardano’s core values and guiding principles, thereby ensuring its long-term sustainability. The Committee’s role is to vote on the constitutionality of governance actions.

The Committee can reject certain governance actions by voting ‘No’, but only when these actions conflict with the Constitution. If they overstep this boundary, the committee can be replaced.

The Committee is tasked with preserving the security, stability, and liveness of Cardano. If a governance action threatens these aspects, the Committee would vote against its ratification. However, if the action does not conflict with the Constitution, the Committee votes ‘Yes’, leaving the final decision to the DReps.

While it’s expected that the Committee will vote ‘No’ only if the governance action is unconstitutional, there may be controversial cases where some members claim it is unconstitutional. The Committee can theoretically prevent the ratification of any governance action. In such cases, moving to a No-Confidence state and replacing the Committee members is possible.

The first governance action, a Motion of No-Confidence, can only be ratified by DReps and Stake Pool Operators (SPOs), not by the Committee members. The Committee does not vote on recalling itself or on changes to its composition, thresholds, terms, etc. They only ratify changes in the Constitution.

The Committee is always in one of two states: a normal state (i.e., a state of confidence) or a state of no confidence.

In a state of no-confidence, the current Committee is unable to participate in governance actions and must be replaced before any governance actions can be ratified. It is possible to vote only on governance action. Replacing the Committee requires a specific governance action, ‘New Constitutional Committee’, which needs approval from both the SPOs and the DReps.

Unlike in Shelley’s governance, the number of Committee members is not fixed and can be arbitrary. If the community wishes, it’s even possible to elect an empty committee, effectively abolishing the Constitutional Committee.

As we have already claimed at the beginning of the article, DReps have the most influence on Cardano's changes, but the Committee ensures that they do not violate the Constitution.

So DReps cannot harm Cardano by ratifying the governance action of setting the block size to 0. However, they can ratify block size increases, which is currently the responsibility of the IOG in collaboration with the Cardano Foundation and Emurgo.

If there is a block size dispute in the Cardano community, there is a way to resolve the dispute. Each ADA holder can propose a governance action with the required block size. If there is a sufficiently large number of DReps (i.e. stake) that will vote YES for the change and the required voting threshold is reached, the change will be ratified and enacted (i.e. activated on-chain) in the next epoch.

No group (part of the community, team, part of SPOs, etc.) can prevent this change. If the change is in accordance with the constitution, i.e. it will be an increase in the size of the block, not a critical reduction, the Constitution Committee is obliged to vote YES.

Note that there is no blockchain fork. The minority must conform to the will of the majority. Alternatively, it is possible to propose another governance action related to reducing the block size and try to get support for this governance action.

Conclusion

In the Voltaire era, Cardano will evolve to a point where the decision-making power lies with the ADA holders. They will have control over the treasury, enabling them to prioritize the tasks that need attention. These tasks could range beyond just protocol development to include aspects like marketing initiatives or crucial partnerships that require investment.

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